Recently Self-Employed? What You Should Know Before Applying for a New Mortgage

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In this day and age, many people are opting to start their own businesses. If you’ve recently moved from W2 status to self-employed and are planning to take advantage of today’s low mortgage interest rates, it’s important to understand some of the lending guidelines that may apply to your situation.

Today’s mortgage lending marketplace is dominated by Fannie Mae and FHA-insured financing, and both will have roughly the same self-employment qualification requirements. First, underwriters will want to see that you have a stable two-year history in the same line of work. It’s not typically a problem if you’ve changed from a W2 job into your own business during the last two years as long as you’ve stayed in the same or a closely related field. If you leave a W2 job and start a business in a completely unrelated field, you’ll likely need to wait until you’ve had your business for at least two years before you’ll be able to use your self-employment income to qualify.

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Related: Will My Flips Qualify for Long-Term Capital Gains or Will I Need to Pay Self-Employment Tax?

Qualifying for a Mortgage With One Year of Self-Employment

Under new regulations, in certain instances, it may be possible to qualify for a mortgage with only one year of experience running your own business, as long as you’re able to show a high level of stability and cash flow for the business seems sound. For case studies illustrating when approval may be made for a business owner after one year of working, click here. In general, Loan Prospector, Freddie Mac’s software, is more likely than Fannie Mae to approval one-year requests, so consider finding a lender who will use this system.

Supplemental Self-Employment Income

If you’ve started a side business to supplement your existing W2 income — even if it’s in the same line of work as your job — you won’t be able to use the income to qualify until you’ve had the business for at least two years. Again, underwriters want to see a two-year track record of earning the income before they’ll allow you to use it to qualify. However, new regulations have made it a bit easier on borrowers by negating the need for verification of self-employment income if you can qualify for the loan using the income from your “salaried” job alone.

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Related: Conventional Mortgage Loans: The Basics on How They Work

Income Verification

The second part of the equation is verifying income. Self-employed borrowers should expect to be asked for full corporate and personal tax returns (where applicable) — which means you’ll need to have been in business for at least a full tax year.

The income used to qualify will be the net income after all deductions, not the pretax figure. Underwriters can often add back some deductions (such as depreciation, depletion, and some other expenses), but if you write off a lot on your taxes, it could be difficult to qualify.

Qualifying with self-employment income has become easier in the past few years. If you have good credit, equity in your home, and can show enough net income on your tax returns, you should be able to take advantage of today’s low rates.

Have you successfully qualified for a mortgage using self-employment income? Any tips or questions?

Leave your comments below!

About Author

Mark Fitzpatrick is a mortgage banking veteran and real estate investor who blogs about mortgage financing and related topics at MortgageMusings.com. You can follow Mark on Google+ or on Twitter. NMLS #382064.

5 Comments

  1. Many people who are “self employed” have not started their own business. Large companies today are limiting the amount of people they employ by bringing folks on board as consultants, paid on a 1099 basis. This is prevalent in the IT and Engineering fields.

    When I was laid off a few years ago, my outplacement counselor told me that at 55, I would have a tough time finding a company to hire me, but if I was willing to consult I’d be working within a month. That’s just the market today. I’ve been with the same company, working a 40 hr a week job, for over 3 years now.

    After I was employed I decided to take out a home equity loan, and the qualifications are a bit different than a for a primary mortgage. Note that I didn’t need money, I just wanted the line of credit there in case I did someday. I was turned down by 3 major banks, citing that they needed a two year tax return history, which can almost be 3 years of employment depending on what time of the year you started. No matter that I had been consistently employed in the same field for 30 years.

    I wasn’t a bad risk at all. I’ve never had a credit issue. I had no late payments or outstanding balances, and no consumer debt. A very large income and I was asking for a small amount that still would have left a 50% loan to value ratio. For someone who was always sought out by lenders, I was now treated like a leper.

    I went back to the well once I had the two years tax returns. Totally different story. I went to my own bank and they verified that I had been paid the same amount every single week for the past 2 and a half years. Easy to check since I had my pay transmitted into a separate account at their bank. Within a few weeks I closed on the home equity line of credit for double I had the previous year.

    What truly stinks is that banks refuse to acknowledge 1099 workers. Many people suffer through a period of unemployment and need to refinance or readjust their debt load upon finding a job, only to find that they are stuck for several years! I guess the government refuses to admit that companies are “cheating” by hiring their workforce on 1099 to avoid tax consequence. That would be acknowledging the sorry state of our economy!

  2. Curt Smith

    Yes re this article to to buy another primary residense that you’ll live in. But today is totally different re portfolio lenders financing rental property.

    You do not need a w-2 job, just decent FICO and the cash for the deal. Typically 70% LTV plus you may have to fund rehab out of pocket. A solution is use hard money to buy and rehab, then use these products to REFI out the day after rehab is complete. I have done these scenarios myself.

    In the order that I like their terms and product choices:

    -visiolending.com Love their 30 yr rental product

    – limaonecapital.com also a great 30yr rental product

    – angeloakprimebridge.com

  3. Huiping Sheng

    Today’s loan can kill people who have full-time job also and the required documents are ridiculous and tedious. The loan broker said there are 50 laws regulate the conventional loan, and the regulation change every year without consistency. Hopefully this will change sometime soon.

  4. Tim Swierczek

    Hey Mark,

    Freddie Mac has changed their policy on 1 year of tax returns. They will still allow SE borrowers who have at least 5 years of SE history to use only 1 year of tax returns but if you have less than 5 years of SE, then you are subject to 2 years of returns. Here is the announcement
    http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1619.pdf

    CHAPTER 5304, SELF-EMPLOYED INCOME
    We are revising and reformatting the requirements and guidance in Chapter 5304 to support the analysis
    and determination of self-employed income. Key changes include:

    ? Loan Product AdvisorSM – Revising the requirement regarding when to identify that a Borrower is selfemployed
    ? Business financial statements – Adding guidance for use of business financial statements as
    additional support for business and income analysis
    ? Rental real estate held in a Partnership and S corporation – Updating Section 5304.1(d) to align with
    Form 91; specifying that the rental real estate income and expenses reported on IRS Form 8825 may be
    treated as business income (or loss)
    ? Verification of current existence of the business – When third-party sources are not available, we are
    adding alternative methods to establish existence of the business
    ? Documentation requirements – The number of years of required tax returns will be based on the
    number of years the business has been in existence
    ? For businesses operating for five or more years, one year of business and personal returns will be
    required
    ? For businesses operating for less than five years, two years of business and personal returns will be
    required

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